Archives: Articles

IssueM Articles

Jackson and RetireUp partner on annuity illustration tool for advisors

Posted on January 17, 2019 by -

Jackson National Life, the leading seller of variable annuities, and RetireUp, the retirement income planning software provider, are partnering on a “Purpose Meets Planning” illustration tool that appears on Jackson National’s website and serves as a “conversation starter” for advisors and clients.

The Purpose Meets Planning tool is now available on Jackson’s Digital Advisor Success Hub (DASH). It is intended to generate interest in Jackson National annuities and in the RetireUp’s retirement planning software among advisors.

The tool allows visitors to the page to see the impact of devoting part of a hypothetical investor’s portfolio to a variable annuity with a lifetime income rider. There are three hypothetical unmarried investors: a 65-year-old, a 55-year-old, and a 45-year-old.

Users of the tool can manipulate “sliders” to the adjust the amount of monthly income the investors need in retirement, that amount of savings they have, and the percentage of their taxable or tax-deferred accounts that they want to apply to the purchase of a variable annuity with an income benefit. The tool then shows if and to what extent the addition of lifetime income to the portfolio reduces each retiree’s risk of running out of money.

“Purpose Meets Planning is targeted to planning-focused advisors trying to visualize what retirement looks like, with or without the benefit of an annuity,” said Dev Ganguly, Jackson’s senior vice president and chief information officer, said in a press release.

RetireUp’s algorithms were chosen to power Jackson National’s wizard after RetireUp participated in a Jackson “Hothouse competition.” The competition is a “creative problem-solving methodology” that Jackson employs to encourage teamwork, innovation and agility.

Six competing cross-discipline teams were given three days to develop a working software prototype for Jackson advisors. A panel of judges that included customers and members of Jackson’s executive leadership team scored the prototypes. RetireUp was part of the business solution voted best among the teams that participated in the invitation-only event.

Based in Libertyville, Illinois, RetireUp creates integrated retirement income planning solutions designed to engage clients and strengthen the client-advisor relationship. RetireUp technology platforms present complex concepts as easily understood numbers and graphics, using actuarial-level product modeling, data integration and an automated forms system to streamline the planning process.

RetireUp president and chief sales officer Michael Roth told RIJ this week that the partnership with Jackson National was the first where RetireUp “provided a custom API integration” with an annuity issuer to create a simple engagement tool on its website. “This is a lighter version of what we do,” he said. “It’s meant to be a simplified view to let advisors see the value that an annuity can provide for their clients.”

But his firm has recently formed partnerships with AXA, Brighthouse Financial and Great-West Financial and built their annuity product specifications into the RetireUp Classic and RetireUp Pro income modeling tools, which RetireUp licenses to independent advisors, captive agents, broker-dealers, registered investment advisors and insurance marketing organizations.

“We’re a goal-based platform,” Roth told RIJ. “We focus on the clients’ essential needs, and you can add new goals or expenses on top of that. We aim for income stability. We want the planning conversation to illuminate all of the risks that retirees can face. The client’s fundamental question is, ‘Can I retire?’ We ask, ‘How can we help them mitigate those risks and stabilize their income.’”

© 2019 RIJ Publishing LLC. All rights reserved.

New York proposes public-option IRA by 2021

Posted on January 17, 2019 by -

Mayor Bill de Blasio to New York City’s small employers: Fuggedabout not offering your employees access to a retirement savings plan at work.

Aiming to make New York the “fairest big city in America,” New York’s mayor announced that he will work with City Council to pass legislation this year requiring employers with five or more employees to either offer access to a retirement plan or auto-enroll their employees in the city plan with a default Roth IRA contribution of the employees’ own earnings of 5%, which the employer can adjust.

Fewer than half of working New Yorkers have access to a retirement savings plan at work and 40% of New Yorkers between ages 50 and 64 have saved less than $10,000 for retirement, Mayor de Blasio said in a release.

For several years, some of America’s state and local officials have worried that a growing population of under-saved Boomers could overwhelm their public assistance resources. With policymakers and private innovators both unable to entice more small employers to offer plans voluntarily, states like California, Washington and Oregon, and now New York City, have advanced their own mandatory savings initiatives.

According to a fact sheet on the New York City proposal:

Employees will be able to choose from a limited menu of low-cost investment options.

The city will create a Retirement Security Fund to be overseen by a board of appointees, managed by a private third party administrator and invested in low-cost indexed mutual funds.

Although the city will subsidize start-up costs, the program will be financed by “low fees” charged to participant accounts.

In 2016, New York City Comptroller Scott M. Stringer unveiled a similar city-run retirement plan for private sector workers, including a city-sponsored multiple employer plan (MEP), but the idea lapsed after President Trump reversed the Obama DOL’s decision to exempt state and local auto-IRA programs from federal oversight.

The proposal must be approved as legislation by the City Council. If it is approved this year, the program would be open to participation by 2021.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on January 17, 2019 by -

iPipeline processes 240,000 annuity transactions in 2018

iPipeline, a provider of cloud-based software for the life insurance and financial services industry, announced a record increase in the number of annuity transactions processed with their AFFIRM for Annuities product in 2018.

AFFIRM for Annuities is used by 35,000 advisors at large financial institutions to execute order entries for variable and fixed indexed annuities.

AFFIRM for Annuities expedites the order-entry process with customized workflows and suitability reviews, enabling financial institutions to meet FINRA, SEC and state compliance requirements.

“The total number of annuity transactions processed through AFFIRM has grown to over 240,000 with total deposits in 2018 reaching $31 billion,” said Tim Wallace, CEO, iPipeline, in a news release.

Fixed indexed annuity sales hit a record quarterly high of $54.9 billion in the third quarter of 2018, according to the Insured Retirement Institute (IRI). “The demise of the DOL fiduciary rule last spring, changing economic conditions, and the broadening acceptance of our next-generation order-entry solution account for much of the increase in transactions and total deposits,” Wallace said in the release.

iPipeline’s Connections 2019 User Meeting & Conference will be held at the Aria Resort & Casino in Las Vegas from March 17-19.

Duke University settles ‘excessive fee’ lawsuit

Schlichter Bogard & Denton, a leading national law firm based in St. Louis, this week filed a preliminary settlement approval motion on behalf of Duke University employees and retirees, in their suits against the university involving their 403(b) retirement plan.

The plaintiffs in the cases, filed in August 2016 and August 2018, sued for alleged breach of fiduciary duty under the Employee Retirement Income Security Act (ERISA). The settlement terms include the creation of a $10.65 million settlement fund for the plaintiffs, as well as non-monetary relief.

The complaints, David Clark, et al., v. Duke University, et al., and Kathi Lucas, et al., v. Duke University, were originally filed in the U.S. District Court in the Middle District of North Carolina.

The case was among the first cases ever filed against a university alleging excessive fees. Schlichter Bogard & Denton also filed the first cases over excessive fees in 401(k) plans.

The complaints alleged that Duke University breached its duties of loyalty and prudence under ERISA by causing plan participants to pay excessive fees for both administrative and investment services in the plan. Duke denied it committed any fiduciary breach in its operation of the plan.

Besides the financial compensation, Duke agreed for a three-year period to: hire an independent consultant regarding bids for recordkeeping services; ease the ability of participants to transfer their investments out of frozen annuity accounts; analyze the cost of different share classes of mutual funds considered for inclusion in the plan; and avoid the use of plan assets to pay salaries of Duke employees who work on the plan.

Oceanwide-Genworth merger moves ahead

In connection with the merger of Genworth Financial, Inc., and China Oceanwide Holdings Group Co., Ltd., the New York State Department of Financial Services (NYDFS) has approved the proposed acquisition of New York-domiciled Genworth Life Insurance Company of New York by Oceanwide affiliates.

Genworth and Oceanwide extended their merger agreement to January 31, 2019 for additional regulatory review.

The two firms have entered into a letter agreement with the NY DFS, acknowledging certain additional requirements relating to cyber-security matters and the protection of customer information. Genworth and Oceanwide have undertaken an Enhanced Data Security to satisfy requirements of the Committee on Foreign Investment in the United States.

With NY DFS’ approval, the transaction has received all required U.S. insurance regulatory approvals. Closing remains subject to other regulatory approvals in China, Canada and by the U.S. Financial Industry Regulatory Authority (FINRA).

© 2019 RIJ Publishing LLC. All rights reserved.

Annuities, RIAs and ‘Cargo Cult’ Thinking

Posted on January 17, 2019 by -

Brighthouse Financial announced this week that it will offer the no-commission version of its Shield Level Select structured annuity through the Envestnet Insurance Exchange (iX). Advisors who use Envestnet’s turnkey asset management platform (TAMP) can use iX to add annuities to their clients’ financial plans.

In joining iX, Brighthouse follows Jackson National, the top variable annuity issuer, Allianz Life, the top indexed annuity issuer, and Global Atlantic, who put products on the platform last year. Envestnet, whose TAMP is widely used in the RIA [registered investment advisor] market, launched iX in mid-May 2018.

Envestnet claims that iX (powered by Fiduciary Exchange software) represents a technical leap forward in annuity sales processing. Advisors whose enterprises use the Envestnet TAMP will be able to access iX and its shelf of annuities through their desktops. iX is said to give insurance-licensed advisors the tools they need to integrate annuities into wealth management plans with unprecedented ease.

“We believe that [the RIA advisor] audience is ready for annuities. Our research shows that if we make the [transaction] process easier, then they’ll use the product,” Alan Assner, head of annuity product development at Brighthouse Financial, told RIJ this week.

The Shield product is a structured indexed annuity that offers exposure to equities through investments in options on equity indexes, rather than direct investment in equities. This type of product offers more upside potential (but less downside protection) than a conventional indexed annuity and more downside protection (but less upside potential)  than a variable annuity. It is designed to protect a portion of a client’s savings from the full impact of a steep loss over a one, three or six-year term.

Anyone with an interest in the future of the annuity market should pay attention to what’s happening on all of the new platforms that strive to expand annuity sales among RIAs. Besides iX, these include the no-commission annuity platforms created in 2018 by DPL Financial and RetireOne.

Such platforms aim to eliminate a couple of perceived advisor objections to annuities: difficulty executing sales and integrating products into their workflow. Annuity issuers have long believed that if annuities look like “just another asset” to advisors, then more advisors will begin to use them routinely.

Or this could be a case of “cargo cult” mentality among annuity issuers. This term refers to a mode of wishful thinking that, by definition, involves a misunderstanding of the cause of a phenomenon and a fervent belief in the wrong solution. In this case, the annuity industry wants to believe that inconvenience alone—rather than the illiquidity, cost, and complexity of the products—prevents more fee-based or fee-only advisors from using annuities.

Time will tell. Either way, as more savings flows from the broker-dealer to the RIA channel, annuity issuers can’t risk being left out of that space. And Envestnet represents a pipeline to RIAs. At the end of 2017, Envestnet’s total platform assets reached about $1.4 trillion in nearly seven million accounts overseen by nearly 60,000 advisors, according to a report last year by benzinga.com.

Talking to Envestnet

Last fall, RIJ conducted a brief email interview with Bill Crager, president of Envestnet and leader of the Envestnet Insurance Exchange. Here are his written responses to our questions:

RIJ: What specific technological issues have had to be overcome on the path to integrating investment/insurance planning, and what hurdles are left on the path to full integration or so-called “straight-through processing” for annuities?

Bill Crager

Crager: There were numerous technological challenges that we’ve worked with FIDx to overcome across the managed account continuum from risk scoring through performance reporting. This industry-changing technology fully integrates annuities into our ecosystem creating a seamless process for our enterprise clients and their advisors to incorporate guaranteed income solutions into their practices. Post our year-end release, our 2019 roadmap features numerous enhancements, such as in-force transaction processing, as we continue to work with FIDx to modernize annuity distribution.

RIJ: I’ve heard that there may be some state-regulatory ambiguity about a non-insurance-licensed RIA’s ability to recommend insurance products and be compensated for it; what is your knowledge of this legal issue?

Crager: We are actively listening to our RIA clients as to how they want to grow their practices and working with legal and compliance experts to best accomplish this objective. In the end, each firm will need to determine how best to manage various regulatory obligations related to sales and compensation.

RIJ: Could RIAs be more interested in using the platform for 1035 exchanges out of annuities, a la Ken Fisher, than in becoming net buyers of annuities?

Crager: We expect to see some 1035 activity on the platform for annuities where it’s in the client’s best interest. We recognize that there is a dichotomy between RIAs recommending annuities and consumer demand for guaranteed income solutions. Our new Insurance Exchange as well as carrier product development with a focus on simpler, fee-based products will help those RIAs who want to provide guaranteed income solutions to their clients.

RIJ: Has the defeat of the Obama DOL fiduciary rule removed some of the impetus/need for a platform for no-commission annuities for RIAs?

Crager: We are still seeing significant growth trends in the advisory business including fee-based annuities with Aite Group predicting that at least half of all client assets will be in fee-based programs by 2025. Supporting this trend, recent LIMRA data has shown that fee-based annuity sales and market share have almost tripled over the past two years.

RIJ: What trend does the emergence of the Envestnet Insurance Exchange, the DPL Financial RIA platform and the RetireOne RIA platform most represent?

Crager: The Envestnet Insurance Exchange represents all of the above but is the first platform to fully integrate annuities into the advisory ecosystem to respond to these trends.

  • Increasing centrality of (and dependency on) technology platforms like Envestnet for advisors, giving them a kind of Amazon or Google leverage in the market.
  • Boomer need for holistic retirement planning;
  • Gravitation of investor assets to the RIA channel;
  • Annuity-issuers’ imperative not to be left out of the RIA channel;
  • Growing interest among RIAs (either hybrid, dually-licensed or not insurance-licensed) to incorporate insurance products into their planning, perhaps as a path to asset consolidation.

RIJ: Thank you, Mr. Crager.

Talking to an analyst

The RIA market, and its investment advisor representatives (IARs), is not easy to understand. They may be “hybrid RIAs” who do or don’t maintain former broker-dealer affiliations and who may or may not be licensed to sell insurance. “Many successful RIAs are experienced ‘breakaways’ from larger traditional firms,” said Donnie Ethier, director of wealth management research and consulting at Cerulli Associates, in an interview this week with RIJ.

Donnie Ethier

“In the past, many RIAs likely used annuities before they transitioned to fee-based or fee-only business. If so, they likely understand annuities and still have clients that own them. While the independent RIA market must be address, hybrid RIAs may prove more successful. Many of them keep their broker-dealer affiliation because they see value in annuities,” he told RIJ.

“The lack of annuity sales among RIAs is definitely not due to a lack of insurers trying,” Ethier noted, but RIAs produced only about $2.7 billion of variable annuity sales in 2017 according to Cerulli’s modeling, he said. That’s slightly less than three percent of the $95.6 billion worth of VAs sold in 2017, according to LIMRA.

“One of the most important initiatives insurers must take is to better design and position annuities with how RIAs run their practices. The platforms [iX, DPL Financial and RetireOne] are important steps in accomplishing that. While I don’t expect RIA sales to immediately explode because of it, I do think its one of many important steps to grow their adoption rates.”

Talking to Brighthouse

The Shield Level Select Advisory Annuity is the no-commission version of Brighthouse’s Shield Level Select structured indexed annuity product. The Shield category of annuities is Brighthouse’s top-selling insurance product, with sales of $2.32 billion through the first nine months of 2018, up about 38% from $1.68 billion for the same period of 2017. Brighthouse (the spin-off of MetLife’s domestic retail businesses) launched the product category in 2017.

Brighthouse’s Assner said that the Shield product’s ability to protect retirees from market volatility would be “complimentary” to the income guarantees that other annuities on the platform will provide.

“We see it as a good fit for the advisors who choose Envestnet,” he told RIJ. Technologically, there’s a world of difference, he said, between merely having his product available on a bank or broker-dealer product shelf and having a presence on an advisor’s Envestnet desktop, where the advisor “can transact an annuity as easily as any other transaction on the platform.”

Brighthouse’s presence on the iX platform would lead to “audience expansion in the hybrid-advisor and true RIA” channels, he added. “We hope to reach both. Today they don’t use annuities.” Brighthouse expects to use the platform to expand sales to dual-licensed (licensed for insurance and security sales) advisors in the short term, but “over the long-term the bigger opportunity will be among the non-insurance-licensed advisor.”

© 2019 RIJ Publishing LLC.

Jack Bogle’s Spirit Lives On

Posted on January 17, 2019 by -

John C. Bogle, the founder of The Vanguard Group, has passed from this world at age 89, an email informed me last night. “Saint Jack” has joined the angel investors on high, his earthly shares redeemed.

For a few years, a long time ago, I was one of the thousands of Vanguard employees who reported to someone who reported to someone who reported to someone who reported to him. But when the occasion once arose, he was the one who held a door open for me.

It’s a privilege to work for a great founder, and he started not just a company but a scrupulous cooperative business model that many admire, few understand, and none of his competitors would likely choose to imitate even if they did understand it. I once described Vanguard as “floating out there in space like the eye over the pyramid on the back of a dollar bill.”

A young Jack Bogle

Bogle built Vanguard but, oddly, didn’t own it. No one seems to. Bogle never demanded personal credit for Vanguard’s growth; instead, he attributed it to the three-way zeitgeist: the Boomer age wave, the 401(k) phenomenon and the information technology revolution. More important than financial success, he achieved a durable brand.

A brand is “a promise kept over and over and over,” a consultant once told me. Bogle kept several promises: to pass on economies of scale to customers, to avoid new ventures that would conflict with the customers’ interests, and to allow no cynicism or complacency toward customers to creep into Vanguard’s broad culture.

(He was legendarily frugal, but he had certain indulgences. The 1798 naval Battle of the Nile was a near-obsession, and the long outer walls of certain Vanguard campus buildings are curved, it was said, to recall, when seen from above, the hull of the HMS Vanguard, Admiral Horatio Nelson’s flagship in that battle.)

As for his policies toward employees, I will always appreciate Vanguard’s decision to contribute 10% of salary to every employee’s 401(k) account, above the company “match.” If every company in America followed that policy, there might be no “retirement savings crisis.”

Most people wear out only one heart in the course of a lifetime. Bogle wore out two: the original and the transplant. “Costs matter,” he was famous for saying. I think people, and a quaint desire to help make the world a more honest and prosperous place, mattered to him more. He’ll be missed.

© 2019 RIJ Publishing LLC. All rights reserved.

‘No Sign of Recession on the Horizon’

Posted on January 10, 2019 by -

When the stock market experiences a down day, the market concludes that the economy could enter a recession by the end of this year and that the Fed will lower rates by year-end.

Forget it. Neither of those things is going to happen.

In mid-December the Fed suggested that it would boost the funds rate twice in 2019, from its current 2.25-2.5% target range to 2.9% by year-end. We still expect that to happen. However, in the near-term more and more Fed officials will advocate for no additional rate hikes until some of the current uncertainty comes to an end.

If that happens, which is what we expect, the Fed may well implement two additional rate hikes later this year.

The Fed continues to believe that potential GDP growth is 1.9%. GDP growth last year was 3.1% and the Fed expects 2.3% growth in 2019. Both growth rates exceed potential. Because the economy is at full employment, the Fed worries that inflation could begin to climb.

Potential growth measures how quickly the economy can grow over the longer-term when it is at full employment. It is interested in, say, a three-year growth rate for the labor force and productivity. We take comfort from the fact that growth for both measures has accelerated in the past year and, most likely, potential GDP growth is on the rise.

Growth in the labor force has picked up considerably. At the end of 2017 the three-year growth rate for the labor force was 0.9%. But the labor force increased 1.6% this year as rapid GDP growth lured some previously unemployed workers back into to work. The three-year growth rate in the labor force has climbed to 1.1%. If it climbs as rapidly this year as in 2018, the three-year growth rate will continue to climb.

Productivity growth has quickened. The three-year growth rate remains sluggish at 0.9% because of slow growth in earlier years. But growth this past year picked up to 1.5% and surpassed the 2.0% mark in the two most recent quarters. Like growth in the labor force, growth in productivity seems to be gathering momentum.

This suggests that potential GDP growth is on the rise. The Fed’s 1.9% estimate probably consists of 0.9% growth in the labor force and 1.0% growth in productivity. But, as described above, growth in the labor force has picked up to at least 1.1%. Productivity growth has climbed to 1.5%. Thus, potential growth is no longer 1.9%. It is probably close to the 2.5% mark.

If that is accurate, the economy can grow at a sustained 2.5% pace without generating inflation. If our forecast of GDP growth for 2018 of 2.8% is accurate, the Fed has little reason to further raise rates. That is particularly true if inflation expectations remain in check. In the past couple of months, inflation expectations have slipped from 2.1% to 1.8%.

Also, keep in mind that the yield curve has flattened considerably in the recent months. With the yield on the 10-year note currently at 2.6% and the funds rate at 2.4%, the yield curve is positive by just 0.2%. The Fed does not want the yield curve to invert. It knows that an inverted curve is a warning sign that a recession is likely within the next year.

If potential growth picks up to a pace roughly in line with projected GDP growth, inflation expectations are declining, and the yield curve is extremely flat, the Fed won’t raise the funds rate any time soon.

While recession chatter has become more widespread in the past month or two, there is no recession on the horizon for the foreseeable future.

© 2019 Numbernomics.

Shelter from the Storm in 2019

Posted on January 10, 2019 by -

What would have to happen for this to be a tranquil year economically, financially, and politically? Answer: a short list of threats to stability would have to be averted.

First, the trade war between the United States and China would have to be placed on hold. In November and December, financial markets reacted positively to each hint of a negotiated settlement and negatively to each mention of renewed hostilities—and for good reason: tariffs that disrupt trade flows and supply chains do global growth no good. And, as we know, what happens in financial markets doesn’t stay in financial markets: outcomes there powerfully affect consumer confidence and business sentiment.

Second, the US economy will have to grow by at least 2%, the consensus forecast incorporated into investor expectations. If growth comes in significantly lower—whether because the sugar high from the December 2017 tax cuts wears off, the Federal Reserve chokes off the expansion, or for some other reason—financial markets will move sharply downward, with negative implications for confidence and stability.

Third, China will have to avoid a significant intensification of its financial problems. Successfully managing a corporate-debt load of 160% of GDP requires not just selectively restructuring bad loans, but also increasing the denominator of the debt- to-GDP ratio. With infrastructure investment weak and manufacturing production declining, China is increasingly unlikely to achieve the authorities’ 2019 target of at least 6% growth. In that case, slow growth and mounting debt problems will feed on one another, dragging down economic performance in China and much of the emerging-market world.

Fourth, voters in the European Parliament election in May will have to prevent the victory of a right-wing nationalist majority hostile to European integration. Europe needs to move forward in order to avoid falling back; the existence of the euro leaves it no choice. For now, moving forward means creating a common deposit insurance scheme for its banks, introducing at least a modest euro-area budget, and augmenting the resources of its rescue fund, the European Stability Mechanism. But if the common currency’s travails during the past decade have taught us one thing, it is that such measures cannot be force-fed to the European public by the elites.

Durable integration requires grassroots support. And that support must be evident at the polls.

All of these happy outcomes are of course far from assured. But if some of them materialize, they will increase the likelihood of others. For example, if US President Donald Trump ends his trade war, the growth outlook in the US and China will brighten. Robust growth there would create a more favorable external environment for Europe, brightening its own economic outlook and bolstering the electoral prospects of mainstream parties and politicians.

Conversely, a poor outcome on one front will dim the prospects on others. Disappointing growth in the US, for example, would cause Trump to seek a scapegoat. If not Fed Chair Jerome Powell and his colleagues, that someone will likely be Chinese President Xi Jinping. In that case, the trade war will be back on, and growth and financial stability in China would suffer accordingly. This combination of US and Chinese economic woes would then drag down growth in other parts of the world, fanning the populist backlash against the political establishment in Europe and elsewhere.

Similarly, if the negative shock is slower growth in China, the authorities in Beijing will almost certainly respond by depreciating the renminbi. This, too, would incite further trade conflict, with negative repercussions all around.

A final prerequisite for a tranquil year is a limited outcome for US Special Counsel Robert Mueller’s investigation into misdeeds by Russia’s government and the Trump family circle. This conclusion might seem odd. If the US president’s erratic personality, disruptive tweets, and counterproductive policies pose such a serious threat to stability, then surely a scathing indictment by Mueller and his team, leading the House of Representatives to draft articles of impeachment, is the most direct route to removing this danger.

But if the Mueller report implicates Trump’s children—Donald Trump, Jr., Eric Trump, and Ivanka Trump and her husband, Jared Kushner—or the president himself, Trump will lash out, as he does whenever he feels the need to defend himself. The likely targets include not just Mueller and the Democratic majority in the US House of Representatives, but also the Fed, China, Mexico, and the countries of Central America and Europe, as Trump lays down an economic smokescreen to cover his political misdeeds. This will roil financial markets and depress investor confidence. And there will be no obvious end to the disruption, given the low likelihood that the Republican-controlled Senate will vote to convict Trump.

Rather than pursuing impeachment, the Democrats should focus on how to beat Trump in the next presidential election. That means crafting an agenda and agreeing on a candidate. In the meantime, we can only cross our fingers and hope for the best. November 2020 is still a long way off.

© 2019 Project Syndicate.

Khalaf succeeds Kandarian as MetLife CEO

Posted on January 10, 2019 by -

Michel A. Khalaf, president, US Business and EMEA (Europe, the Middle East and Africa), will succeed Steven A. Kandarian as MetLife’s president and CEO, effective May 1, 2019, MetLife announced this week. Khalaf also has been appointed to the MetLife board effective May 1.

Kandarian, who is retiring, will serve through April 30, 2019.

Khalaf has been MetLife’s president of EMEA since 2011 and in July 2017 added responsibility for the company’s US Business. In his expanded role, he has overseen:

  • The group benefits, retirement and income Solutions, and property & casualty businesses in the United States
  • Global employee benefits (GEB), MetLife’s only horizontal business providing employee benefits solutions to local and multinational employers in 39 markets
  • Individual and group insurance businesses sold through agents, brokers, banks and direct channels in more than 25 countries throughout Europe, the Middle East and Africa

Prior to taking on the leadership of EMEA, Khalaf was executive vice president and CEO of MetLife’s Middle East, Africa and South Asia (MEASA) region. He joined MetLife through its acquisition of American Life Insurance Company (Alico) from American International Group (AIG) in 2010.

In his 21 years at Alico, Khalaf held a number of leadership roles in various markets around the world including the Caribbean, France and Italy. In 1996, he was named the first general manager of Alico’s operation in Egypt. In 2001, he assumed the position of regional senior vice president in charge of Alico’s Life, Pension and Mutual Fund operation in Poland, Romania and the Baltics, as well as president and CEO of Amplico Life, Alico’s life insurance subsidiary in Poland. Later, he served as deputy president and chief operating officer of Philamlife, AIG’s operating company in the Philippines.

Khalaf is a graduate of Syracuse University with a Bachelor of Science degree in engineering and a Master of Business Administration in finance. He is a fellow of the Life Management Institute.

Kandarian became president and CEO on May 1, 2011, and chairman of the board of directors on January 1, 2012. He joined MetLife in April 2005 as executive vice president and chief investment officer (CIO). From 2007 to 2011, he also led MetLife’s enterprise-wide strategy, which identified key focus areas for the company.

As CIO, Kandarian oversaw the company’s more than $450 billion (as of Dec. 31, 2010) general account portfolio. He enhanced the company’s focus on effective risk management and diversified MetLife’s investment portfolio, including through the $5.4 billion sale of Peter Cooper Village/Stuyvesant Town in 2006. His efforts helped MetLife emerge from the 2008 financial crisis with the strength to execute the company’s $16.4 billion purchase of Alico in 2010.

Glenn Hubbard, currently MetLife’s independent lead director, will become MetLife’s non-executive chairman on Kandarian’s retirement. Hubbard joined the MetLife board in 2007 and became lead director in June 2017. Since 2004, Hubbard has been the Dean and Russell L. Carson Professor of Economics and Finance at Columbia University’s Graduate School of Business.

© 2019 RIJ Publishing LLC. All rights reserved.

Conning assesses life and annuity businesses

Posted on January 10, 2019 by -

Conning, the pension and investment research and consulting firm, has released a proprietary new report, “2019: Life-Annuity Value Creation Strategies: Reorganization and New Players.” According to the executive summary of the report:

Since the financial crisis of 2008, life and annuity insurers have enjoyed almost a decade of positive statutory net income. Over that time, insurers have pursued both organic and inorganic growth strategies to increase net income. This study focuses on the inorganic strategies that insurers have used over the last decade. We focus on how insurers are creating value by strategically repositioning their companies.

Organizational Repositioning to Create Value

We identified 22 case studies of insurers pursuing value creation through organizational repositioning over the period from 2010 into 2018. These case studies represented approximately 25% to 30% of statutory assets and premium at the end of 2017.

Analyzing these case studies based on ownership structure and product features provided insight into potential reasons certain types of insurers may be more likely to pursue organization repositioning than other types. Further analysis explored the types of strategies used and the drivers behind its usage. Our analysis found that stock companies may be more likely to adopt organizational repositioning as a strategy than would fraternal or mutual insurers.

Capital Redeployment

Regulatory pressure, shareholder pressure, and annuity volatility pressure lead some insurers to increase value creation through organizational repositioning. Of these three, regulatory pressure applies to all insurers. Shareholder pressure and annuity volatility are limited to stock companies and annuity providers, respectively.

Our analysis of these pressures suggests that they are likely to remain in place. These continued pressures are likely to create more closed blocks of business. Insurers with those closed blocks will seek to divest them. For those companies, the emergence of new entrants, specialist insurers that want to assume closed blocks of long-tail liabilities, is a favorable development.

The First Wave of New Entrants

The first wave of New Entrants, which entered the market between 2004 and 2010, identified an opportunity for certain types of owners to build a business around managing closed blocks of annuities. For these companies, the attraction to the life-annuity industry was the ability to acquire assets for their asset management businesses at a lower cost.

In terms of value creation, early results suggest this model has been successful, even after accounting for capital infusions from the New Entrants. The business model and opportunity appear to hold the potential for future value creation.

For the broader life insurance industry, the emergence of these New Entrants provided the capacity to absorb closed blocks of annuities. Looking ahead, these companies may provide a similar function for other blocks of business. That further development can be seen in the continued emergence of the second wave of New Entrants and the evolution of their business model.

The Second Wave of New Entrants Emerge

The emergence of a second wave of New Entrants is a strong indication of the attraction of closed blocks and runoff companies to investors. This attraction is driven by the continued flow of capital to asset managers and their need to generate competitive returns for their clients. That need has led asset managers to pursue alternative assets, of which life and annuity blocks are one example.

The second wave of New Entrants benefits from a business model proven by the first wave of New Entrants. Our analysis of the second wave of New Entrants shows there has been a clear evolution to that business model. This evolution appears to be positioned to assume more complex risks and liabilities.

Looking ahead, as more New Entrants form, competition for liabilities could increase and impact pricing if the supply of liabilities is limited. Our analysis indicates that as New Entrants continue to emerge, competition could lead them to expand beyond a focus on annuities. Looking for liabilities beyond annuities may be one solution to reducing the impact on pricing.

© 2019 Conning. Used by permission.

A retirement account for cryptocurrency buffs

Posted on January 10, 2019 by -

BitcoinIRA.com has launched a turnkey, white-label solution that will enable “enterprise businesses” to invest their customers’ savings into a Bitcoin IRA and allow customers to trade inside their account.

It can be used around-the-clock by registered investment advisors (RIAs), wealth managers and other licensed money managers with customers who want to invest in cryptocurrencies, according to a news release this week. Advisors can also allow customers “to trade for themselves and monitor their activity through a back-end administrative portal.”

Bitcoin IRA does not hold any of the funds. Management fees are distributed as trades are completed.

Bitcoin IRA’s enterprise program uses multi-signature “cold storage” wallets from BitGo. It also has a BSA/AML compliance program, two-factor authentication and a $1 million Consumer Protection insurance policy, according to a prepared statement by Bitcoin IRA Chief Operating Officer Chris Kline.

Bitcoin IRA recently launched Self-Trader, which enables customers to buy, sell, and swap cryptocurrencies directly inside their retirement accounts, 24 hours a day, 7 days a week. The launch also included a full BitcoinIRA.com website redesign, a new application process, new real-time cryptocurrency price charts, a knowledge center, order history reporting and more.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on January 10, 2019 by -

Advances in ‘A.I.’ favor direct channel growth: Cerulli

The direct-to-investor channel, which maintains relationships with nearly 40% of U.S. retail investor households, now accounts for more than $7 trillion in assets under management (AUM), according to Cerulli Associates, the global research and consulting firm.

Even with modest return expectations, this segment could easily approach $10 trillion by the end of 2022, the firm predicts. “Growth will be driven by a combination of investor choice and investor returns over the next few years,” a Cerulli release said.

“As direct providers increasingly layer-in enhanced advice offerings with access to highly trained advice personnel, traditional advisory firms will need to redouble their efforts to maintain their market share in the face of the growing presence of the firms in this segment,” said Scott Smith, director at Cerulli, in a prepared statement.

“Encouraging investors to use online planning tools is a prime opportunity for providers to help investors better understand their relative progress toward goals, while also uncovering unmet product needs,” added Smith. “To boost user engagement, providers must consider making their planning suites as modular as possible, with frequent feedback to reward incremental progress.”

“The use of artificial intelligence technology to augment online support and chat features is a major opportunity for platform providers to increase customer satisfaction,” he said.

“By logging users’ previous actions and stated goals, these tools will be better able to anticipate what answers investors seek and present product solutions even before investors know they want them.

“With advances in online advertising, providers are better able to target prospective clients who could be persuaded into action by promotions such as cash additions for significant account transfers. By delivering these offers through targeted advertising, providers can add assets without undermining the profitability of assets gathered organically through other avenues,” Smith added.

These findings are from the January 2019 issue of The Cerulli Edge—U.S. Asset and Wealth Management Edition, which explores the challenges and opportunities facing providers attempting to grow assets under management in the high-net-worth, Millennial, and mass markets.

Securian issues new MYGA contract

Securian Financial has launched SecureOption Choice, a new fixed deferred annuity designed to be competitive in the multi-year guaranteed annuity (MYGA) marketplace, according to a news release this week.

SecureOption Choice, issued by Minnesota Life Insurance Company, offers guaranteed interest throughout the term of the annuity with no exposure to market risk.

Key product features include:

  • Competitive rates
  • Liquidity features
  • 3-, 5-, 7- and 9-year guarantee periods
  • 10% free annual withdrawals after the first year

“Clients continue to seek retirement products offering guaranteed returns. SecureOption Choice gives financial professionals a competitive new option to meet this growing need,” said Chris Owens, Securian Financial’s national sales vice president for retail life insurance and annuities, in the release.

SecureOption Choice is available to all Securian Financial-approved distribution channels.

Small employers warm to retirement plans: LIMRA

Only 42% of businesses with fewer than 100 employees offer retirement benefits (either alone or with insurance benefits), even though research shows that Americans’ top financial concern is affording a comfortable retirement, LIMRA reported this week.

But a LIMRA survey shows that 40% of those small business employers regard retirement benefits as “more important now than three years ago,” with 57% saying it is “equally as important.”

The larger the small business, the more likely they were to say retirement benefits are more important today than three years ago. Only 37% of employers with less than 10 employees say retirement benefits are more important now than three years ago, compared with 64% in companies with 50-99 employees.

Separate LIMRA SRI research points out that access to a retirement plan is essential to saving. Nearly 4 in 10 of all workers said they began saving for retirement because their employer offered a retirement savings plan. While 36% of small businesses don’t currently offer retirement benefits to their employees, 4% plan to in the next two years, and 19% of them report they might.

Open multiple-employer plans (MEPs) — retirement plans that are sponsored by multiple employers—could increase coverage for small business employees. Federal proposals in 2018 are intended to broaden the number of small employers who can participate in MEPs (by allowing many unrelated employers to join a single plan).

Citigroup settles 401(k) fiduciary lawsuit for $6.9 million

A $6.9 settlement of a suit filed in 2007 against Citigroup by its 401(k) plan participants has been approved by a federal judge, NAPA Net reported this week.

According to the original suit, Citigroup’s plan fiduciaries put the company’s own interests ahead of participants’ interests “by choosing investment products and pension plan services offered and managed by Citigroup subsidiaries and affiliates, which generated substantial revenues for Citigroup at great cost to the 401(k) plan.”

The settlement included $2.3 million for the plaintiffs’ attorneys, $15,000 for each of two class representatives and $374,100 for case-related expenses.

The remaining $4.2 million can be distributed to the approximately 300,000 former workers and retirees who invested in certain funds in the 401(k) plan between Oct. 18, 2001, and Dec. 1, 2005, or an average of $140 each.

“Defendants, defendants’ beneficiaries, and defendants’ immediate families” were excluded from the settlement.

Citigroup admitted no wrongdoing in the settlement, which the parties reached last August. The bank denied “…all allegations of wrongdoing, fault, liability, or damage to the Plaintiffs and the Class, deny that they have engaged in any wrongdoing or violation of law or breach of duty, and believe they acted properly at all times.”

Citigroup maintained that “(a) the fees charged by the nine investment options at issue were reasonable and not unduly high; (b) the performance of the nine investment options at issue was reasonable and, in any event, irrelevant; and (c) the choice to include the nine funds among many other investment options, was reasonable.”

The judge declared that in the case of Leber et al. v. The Citigroup 401(k) Plan Investment Committee et al. (case number 1:07-cv-09329, in the U.S. District Court for the Southern District of New York) that “the Settlement resulted from arm’s-length negotiations; (b) the Settlement Agreement was executed only after Class Counsel had conducted appropriate investigation and discovery regarding the strengths and weaknesses of Plaintiffs’ claims and Defendants’ defenses to Plaintiffs’ claims; and (c) the Settlement is fair, reasonable, and adequate.”

© 2019 RIJ Publishing LLC. All rights reserved.

 

Two Client-Centric Income Strategies

Posted on January 10, 2019 by -

Assume that your clients, a 65-year-old married couple with $1 million in savings, are too risk-averse to rely entirely on the traditional “4%” withdrawal method for retirement income, but too risk-hungry to commit half their money to a single premium immediate annuity (SPIA).

To give them maximum flexibility, you could recommend a variable deferred annuity or an indexed annuity with a guaranteed lifetime withdrawal benefit (GLWB). That would keep all their options open. But, at 65, they’re already past the ideal age for buying that type of product and maximizing its 10-year deferral bonuses.

So let’s consider two other, less orthodox ways to use annuities. I’ll call them the “Safety Last” and Safety First” approaches. The Safety Last approach uses an annuity to guarantee income over the last stage of retirement. The Safety First approach, by contrast, guarantees income over the initial stage.

In this informal thought-experiment, I compare these two strategies. But not in the usual way. Instead of trying to assess them by the amount of annual income they might generate or the final wealth they might deliver, I’ll introduce the ida that they target different risks, and suggest that the “best” method may be the one that eliminates the clients’ biggest financial anxiety. It’s a primarily client-centric approach to income planning.

Safety Last?

The Safety Last approach insures the latter part of life through the purchase of a deferred income annuity (DIA) or its pre-tax cousin, a qualified lifetime annuity contract (QLAC). Suppose that your clients use a quarter of their savings ($250,000) to buy a joint-life DIA or QLAC with a cash refund that returns unpaid premium to their beneficiaries. (Adding a cash refund feature to a joint-life contract doesn’t appear to reduce monthly income as much as it would for a single-life contract.)

Based on data from immediateannuities.com, $250,000 would buy a $40,000 annual income stream beginning at age 80. The clients would invest the remaining $750,000 as you recommend and spend it down by about $30,000 (4%) a year. Assume that $30,000 plus Social Security will cover their essential annual expenses.

A newly-published report from the Employee Benefits Research Institute (EBRI) in recent years offers evidence that people who use between 5% and 25% of their 401(k) balances to buy a DIA or QLAC can raise their personal Retirement Readiness Ratings (a benchmark EBRI created) and reduce their risk of running short of money in retirement. EBRI set the start date of their hypothetical DIA at age 85 in that study.

The study showed that DIAs, as expected, favor the people who live the longest. Anyone who died or fell seriously ill before receiving benefits would lose their premium if the DIA has no cash refund feature, early-distribution-for-illness clause, or flexible start-date. The study also showed that people with very little savings or a ton of savings don’t have much to gain from buying a DIA or QLAC. The poorest people tend to need all their money for current expenses, while the wealthiest aren’t at great risk of running out of money.

But for the so-called mass-affluent, especially those in good health and those who might take comfort in knowing that they’ll have a safe income stream at a time when they might face mental or physical decline, then DIAs or QLACs could make a lot of sense.

Safety first?

Now let’s reverse that strategy and consider buying guaranteed income for the first decade of retirement rather than the latter stages. Instead of applying one-quarter of the couple’s savings to a DIA starting at age 80, they could apply that $250,000 to the purchase of a 10-year period certain annuity paying about $28,000 a year or a comparable 10-year bond ladder.

This was more or less the strategy presented by advisor Dana Anspach, founder of Sensible Money in Scottsdale, AZ, and the principals at Asset Dedication, J. Brent Burns and Stephen J. Huxley, during an Investment & Wealth Institute (IWI) conference for Retirement Management Analysts near Jacksonville, FL, in early December. They used a bond ladder; I use a period certain annuity as a proxy. It’s easy to price with an online calculator.

This strategy eliminates sequence risk. It assures clients that even if their investments go bust during the first few years of retirement they wouldn’t need to sell depressed assets in order to generate income. It appeals to investors who believe in “stocks for the long run,” and who like the idea of giving 75% of their assets ten years to grow undisturbed. At the IWI conference, Burns and Huxley strongly recommended putting part of that money in small-cap value funds, which, they argued, perform best over the long run.

Clients who choose this strategy don’t necessarily face a risk “cliff” when the bond ladder or the period certain annuity ends. Over the initial ten years of retirement, they can harvest gains from their at-risk assets and extend the bond ladder or purchase more years of annuity income.

Where life-contingent annuities can introduce new elements of uncertainty—Will we die early? Will the beneficiaries feel cheated?—into the income planning process, a period certain annuity with a death benefit adds true certainty. (Period certain annuities do not provide mortality credits, however, unless the contract is a “temporary life annuity,” where the payments stop if the annuitants die before the end of the term.)

The larger point

We’ve now looked at two strategies that are driven by two of the risks that concern retirees the most: The risk of outliving their money and the risk of experiencing a market crash early in retirement. In that sense, they’re starkly different from each other. But they’re similar in one way. Both call for annuitizing only 25% of the client’s portfolio while leaving plenty of assets for extraordinary expenses, additional income or aggressive investment. (This example includes annuities with cash refund features so clients have no reason to worry about forfeiting assets if they die early.)

More to the point, these strategies represent a client-centric, risk-driven approach to retirement income planning. Advisors often look for the technique that generates, say, the most monthly income, the lowest taxes, the most final wealth, or the lowest failure rate. Or they may recommend strategies that suit their own habits or revenue models. But, if a client’s sense of security in retirement is the goal, the best solution (all else being equal) might be the one that addresses the risk that worries the client the most.

© 2018 RIJ Publishing LLC. All rights reserved.

 

In Defense of the Fed

Posted on January 3, 2019 by -

I have not been a fan of the policies of the US Federal Reserve for many years. Despite great personal fondness for my first employer, and appreciation of all that working there gave me in terms of professional training and intellectual stimulation, the Fed had lost its way. From bubble to bubble, from crisis to crisis, there were increasingly compelling reasons to question the Fed’s stewardship of the US economy.
That now appears to be changing. Notwithstanding howls of protest from market participants and rumored unconstitutional threats from an unhinged US president, the Fed should be congratulated for its steadfast commitment to policy “normalization.” It is finally confronting the beast that former Fed Chairman Alan Greenspan unleashed over 30 years ago: the “Greenspan put” that provided asymmetric support to financial markets by easing policy aggressively during periods of market distress while condoning froth during upswings.

Since the October 19, 1987 stock-market crash, investors have learned to count on the Fed’s unfailing support, which was justified as being consistent with what is widely viewed as the anchor of its dual mandate: price stability. With inflation as measured by the Consumer Price Index averaging a mandate-compliant 2.1% in the 20-year period ending in 2017, the Fed was, in effect, liberated to go for growth.

And so it did. But the problem with the growth gambit is that it was built on the quicksand of an increasingly asset-dependent and ultimately bubble- and crisis- prone US economy.

Greenspan, as a market-focused disciple of Ayn Rand, set this trap. Drawing comfort from his tactical successes in addressing the 1987 crash, he upped the ante in the late 1990s, arguing that the dot-com bubble reflected a new paradigm of productivity-led growth in the US. Then, in the early 2000s, he committed a far more serious blunder, insisting that a credit-fueled housing bubble, inflated by “innovative” financial products, posed no threat to the US economy’s fundamentals. As one error compounded the other, the asset-dependent economy took on a life of its own.

As the Fed’s leadership passed to Ben Bernanke in 2006, market-friendly monetary policy entered an even braver new era. The bursting of the Greenspan housing bubble triggered a financial crisis and recession the likes of which had not been seen since the 1930s. As an academic expert on the Great Depression, Bernanke had argued that the Fed was to blame back then. As Fed Chair, he quickly put his theories

to the test as America stared into another abyss. Alas, there was a serious complication: with interest rates already low, the Fed had little leeway to ease monetary policy with traditional tools. So it had to invent a new tool: liquidity injections from its balance sheet through unprecedented asset purchases.

The experiment, now known as quantitative easing, was a success – or so we thought. But the Fed mistakenly believed that what worked for markets in distress would also spur meaningful recovery in the real economy. It raised the stakes with additional rounds of quantitative easing, QE2 and QE3, but real GDP growth remained stuck at around 2% from 2010 through 2017 — half the norm of past recoveries. Moreover, just as it did when the dot-com bubble burst in 2000, the Fed kept monetary policy highly accommodative well into the post-crisis expansion. In both cases, when the Fed finally began to normalize, it did so slowly, thereby continuing to fuel market froth.

Here, too, the Fed’s tactics owe their origins to Bernanke’s academic work. With his colleague Mark Gertler of NYU, he argued that while monetary policy was far too blunt an instrument to prevent asset-bubbles, the Fed’s tools were far more effective in cleaning up the mess after they burst. And what a mess there was! As Fed governor in the early 2000s, Bernanke maintained that this approach was needed to avoid the pitfalls of Japanese-like deflation. Greenspan concurred with his famous “mission accomplished” speech in 2004. And as Fed Chair in the late 2000s, Bernanke doubled down on this strategy.

For financial markets, this was nirvana. The Fed had investors’ backs on the downside and, with inflation under control, would do little to constrain the upside. The resulting “wealth effects” of asset appreciation became an important source of growth in the real economy. Not only was there the psychological boost that comes from feeling richer, but also the realization of capital gains from an equity bubble and the direct extraction of wealth from the housing bubble through a profusion of secondary mortgages and home equity loans. And, of course, in the early 2000s, the Fed’s easy-money bias spawned a monstrous credit bubble, which subsidized the leveraged monetization of housing-market froth.

And so it went, from bubble to bubble. The more the real economy became dependent on the asset economy, the tougher it became for the Fed to break the daisy chain. Until now. Predictably, the current equity market rout has left many aghast that the Fed would dare continue its current normalization campaign. That criticism is ill-founded. It’s not that the Fed is simply replenishing its arsenal for the next downturn. The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values.

The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy. It is great to be a fan of the Fed again.

© 2018 Project Syndicate.

When the Fed tightens, emerging market borrowers feel the pinch

Posted on January 3, 2019 by -

Roughly 80% of cross-border loans to emerging market economies are estimated to be denominated in U.S. dollars. Dollar-denominated credits make up 60% of Europe’s emerging market economies’ cross-border lending and over 90% of foreign banks’ loans to emerging market economies in Africa, Asia, and the Americas. Foreign bank loans account for about half of all emerging market economies’ external liabilities.

In a new research paper, “U.S. Monetary Policy and Emerging Market Credit Cycles” (NBER Working Paper No. 25185), authors Falk Bräuning and Victoria Ivashina find that when the Federal Reserve lowers U.S. interest rates, the volume of cross-border loans by global banks goes up, particularly to emerging market borrowers.

Studying the 1980-2015 period, they find that a four percentage point cut in the Federal Reserve’s target interest rate (a typical decrease during an easing cycle) raised loan volumes in emerging markets by 32% relative to the volumes in developed markets. This was true even after accounting for differences in GDP growth, inflation, and forecast future economic performance.

Loan volumes also respond to the yield spread — the difference between the 10-year U.S. Treasury yield and the federal funds rate. As the spread narrows and banks rebalance their lending portfolios toward riskier assets, a one percent decrease in the U.S. spread increases emerging market economy lending volumes by about 16%. This effect was particularly relevant earlier this decade, when the Federal Reserve kept the federal funds rate at zero and eased monetary policy through unconventional measures that directly impacted long-term rates.

Monetary policy easing also is associated with higher loan volumes to riskier firms. In response to a 25 basis point decrease in the U.S. federal funds rate, firms with a one percentage point higher borrowing cost than their country average experienced a one percent higher increase in loans than that afforded to average borrowers.

When U.S. monetary policy tightens, the pendulum swings the other way. Increases in the federal funds rate of 25 basis points were associated with a 4.2 percentage point larger overall decline in dollar credit for emerging market firms than for developed market firms. Local bank lenders do not offset a contraction in foreign bank credit. Rather, local dollar credit also contracts. A 25 basis point increase in the federal funds rate leads to a 3.5 percentage point drop in local credit.

Changes in eurozone rates affect the volume of euro-denominated cross-border lending of U.S. banks to non-euro borrowers, but they do not affect the volume of dollar-denominated credits. “Foreign monetary policy is relevant only for the loans in the corresponding foreign currency,” the researchers concluded.

The researchers used data from the Thompson Reuters DealScan database on global syndicated corporate loan issues. It showed the same result for non-U.S. banks and for banks with portfolios that have little exposure to the United States. The results apply to borrowers in non-tradable industries and those in countries having little trade linkage with the United States, even when controlling for individual borrowers, their home countries, loan amounts, currency, maturity, interest rates, and lenders in the loan syndicate.

© 2019 RIJ Publishing LLC. All rights reserved.

In Austria, earlier retirement was associated with earlier death

Posted on January 3, 2019 by -

Many workers dream of retiring as early as possible to pursue travel, leisure, sport, and other pursuits. But new research suggests that some individuals, particularly men, might want to postpone retirement. They might live longer.

Austrian men who took advantage of a temporary change in unemployment insurance rules and retired early experienced an increased risk of premature death, according to “Fatal Attraction? Extended Unemployment Benefits, Labor Force Exits, and Mortality,” NBER Working Paper (No. 25124). The effect wasn’t seen in women.

Researchers Andreas Kuhn, Stefan Staubli, Jean-Philippe Wuellrich, and Josef Zweimüller analyzed a unique public program in Austria in the late 1980s and early 1990s that was adopted when that nation’s steel sector underwent dramatic layoffs. To cushion the economic blow to older workers, the Austrian government implemented the Regional Extended Benefits Program (REBP).

This program effectively allowed workers in some regions of Austria to take early retirement via disability insurance or old-age pension programs. It induced a significant increase in early retirement.

Using information from the Austrian Social Security Database, the researchers compiled information on 310,440 men and 144,532 women—excluding those from the steel sector—and compared data from REBP-eligible regions and nearby non-REBP regions. They compared the employment histories, incomes, gender, age, retirement dates, and age at death of those who took early retirement and those who were eligible but did not.

The researchers found that an additional year in early retirement increased a man’s probability of death before age 73 by 1.85 percentage points — equivalent to a relative increase of 6.8%—and reduced the age at death by an average of about 10 weeks. For women, early retirement was not associated with elevated mortality, a finding that is in line with previous research by others.

They also found that the changes in lifetime income associated with early retirement were negligible, particularly when generous government old-age benefits were counted, and that they could not explain the increased mortality among certain groups of the population. Thee researchers suggest that lifestyle changes may explain the study’s mortality findings.

Men in blue-collar occupations, men with low-work experience, and men who had some pre-existing health impairment displayed higher mortality effects than men in white-collar occupations. An additional year in early retirement increased the probability of death before age 73 by 1.91 percentage points for blue collar men, 3.45 percentage points among men who have spent some time on sick leave, and by 2.42 percentage points among men with low work experience.

To check the robustness of their findings, the researchers analyzed data from before and after the early retirement program and found no differences in mortality and early retirement trends between those two periods.

© 2019 RIJ Publishing LLC. All rights reserved.

JPMorgan Chase to pay $135 to settle SEC charges

Posted on January 3, 2019 by -

JPMorgan Chase Bank N.A. will pay more than $135 million to settle charges of improper handling of “pre-released” American Depositary Receipts (ADRs), the Securities and Exchange Commission announced.

ADRs, which are U.S. securities that represent foreign shares of a foreign company, require a corresponding number of foreign shares to be held in custody at a depositary bank. The practice of “pre-release” allows ADRs to be issued without the deposit of foreign shares, provided brokers receiving them have an agreement with a depositary bank and the broker or its customer owns the number of foreign shares that corresponds to the number of shares the ADR represents.

The SEC’s order found that JPMorgan improperly provided ADRs to brokers in thousands of pre-release transactions when neither the broker nor its customers had the foreign shares needed to support those new ADRs.

Such practices resulted in inflating the total number of a foreign issuer’s tradeable securities, which resulted in abusive practices like inappropriate short selling and dividend arbitrage that should not have been occurring.

This was the eighth action against a bank or broker, and the fourth action against a depositary bank, resulting from the SEC’s ongoing investigation into abusive ADR pre-release practices.  Information about ADRs is available in an SEC Investor Bulletin.

“With these charges against JPMorgan, the SEC has now held all four depositary banks accountable for their fraudulent issuances of ADRs into an unsuspecting market,” said Sanjay Wadhwa, Senior Associate Director of the SEC’s New York Regional Office.  “Our investigation continues into brokerage firms that profited by making use of these improperly issued ADRs.”

Without admitting or denying the SEC’s findings, JPMorgan agreed to pay disgorgement of more than $71 million in ill-gotten gains plus $14.4 million in prejudgment interest and a $49.7 million penalty for total monetary relief of more than $135 million.  The SEC’s order acknowledged JPMorgan’s cooperation in the investigation and remedial acts.

Philip A. Fortino, William Martin, Andrew Dean, Elzbieta Wraga, Joseph P. Ceglio, Richard Hong, and Adam Grace of the New York Regional Office are conducting the SEC’s continuing investigation, with supervision by Sanjay Wadhwa.

© 2019 RIJ Publishing LLC. All rights reserved.

Medicare premiums for 2019

Posted on January 3, 2019 by -

The Centers for Medicare & Medicaid Services (“CMS”) has announced the Medicare Part A deductibles and Part B premiums for 2019. Medicare Part A covers inpatient hospital and hospice care, while Part B covers outpatient services such as doctors’ visits.

According to a Wagner Law Group bulletin:

  • The Part A deductible for inpatient hospital expenses will be $1,364 in 2019, a $24 increase over the prior year.
  • For the 61st through 90th day of hospitalization, the per diem coinsurance cost will be $341.
  • Hospital stays over 90 days will cost $682 per day.
  • Daily coinsurance for the 21st to 100th day in a skilled nursing facility will cost $170.50 in 2019.
  • The standard Medicare Part B monthly premium for 2019 will, for most individuals, be $135.50.
  • Single beneficiaries with incomes over $85,000 and married couples with incomes of over $170,000 will pay a higher Part B premium, based on a sliding scale, as required by the Medicare Modernization Act.

© 2019 RIJ Publishing LLC. All rights reserved.

Honorable Mention

Posted on January 3, 2019 by -

Transamerica sued by its own 401(k) participants

In a federal class action suit, the participants in Transamerica Corporation’s own $1.7 billion 401(k) plan have sued the giant financial services firm, accusing it of violating its fiduciary duties by offering proprietary Transamerica funds that significantly trailed their benchmarks.

The suit was filed December 28 in the U.S. District Court of Northern Iowa by the law firm of Sanford Heisler Sharp, LLP. The complaint alleges the company invested employees’ retirement savings in multiple funds that consistently underperformed their investment benchmarks and other similar collective investment funds, resulting in the loss of millions of dollars in potential savings.

“Transamerica retained too many poor-performing investment options on the plan,” said David Sanford, chairman of Sanford Heisler Sharp and counsel for the plaintiffs and the proposed class, in a release.

According to the complaint, Transamerica offered the plan’s participants “substandard investment options” that were managed by a Transamerica affiliate, Transamerica Asset Management that “consistently underperformed their benchmarks” between 2008 and 2017.

The funds named in the lawsuit are:

  • Transamerica International Equity Portfolio
  • Transamerica Small Core Portfolio
  • Transamerica Large Value Portfolio
  • Transamerica Large Growth Portfolio
  • Transamerica High Yield Bond Portfolio
  • Transamerica Mid Value Portfolio

“During the 2008-2017 time period, the International Equity Portfolio underperformed its benchmark, the Morgan Stanley All-World Country Index ex-USA, by approximately 30%. During the same period, the Small Core Portfolio underperformed its benchmark, the Russell 2000 Index, by over 15%,” the complaint said.

According to the plan documents dated September 1, 2018, “the International Equity Portfolio, the Small Core Portfolio and the Mid Value Portfolio each underperformed their respective investment benchmarks for the past one, five, and ten-year periods. The Large Value Portfolio, the Large Growth Portfolio, and the High Yield Portfolio each underperformed their respective investment benchmarks for the past five and ten-year periods,” the suit said.

Plaintiffs Jeremy Karg, Matthew R. LaMarche, and Shirley Rhodes each filed the case individually and as representatives of approximately 17,000 plan participants in Transamerica’s 401(k) plan. Named as defendants are the Transamerica Corporation and the committees and their members that provide investment advice and services to the plan.

Plaintiffs and the class are asking for compensation for financial losses to plan participants and beneficiaries resulting from the plan’s underperforming investments; divestiture of imprudent investments; and the removal of the fiduciaries who may have violated their duties to the plan’s participants and beneficiaries under ERISA.

What a difference a month makes

For U.S. mutual funds and ETFs, November was the calm before the storm.

Mutual fund assets grew by just 0.6% in November, according to the December 2018 issue of The Cerulli Edge – U.S. Monthly Product Trends Edition. Assets stood $14.5 trillion with one month left in the year.

Net negative flows of $49.5 billion undermined asset growth, but November saw a rebound of sorts, with total assets increasing about 2.9%. Year-to-date total assets have increased 4.9%.

For exchange-traded funds (ETFs), net flows returned to a healthy level in November, with ETF products cumulatively adding more than $47.0 billion. This total was the second largest in any month of 2018 thus far.

Financial wellness. While the term financial wellness can be ambiguous, at its most fundamental level it emphasizes holistic advice and goes beyond a participant’s workplace retirement savings account.

While it is no small task for providers to integrate the myriad financial wellness components, Cerulli views this as a worthwhile initiative, and potential competitive advantage, as plan sponsors (and their advisors/consultants) begin to evaluate these offerings more closely.

Target-date Funds. As the target-date fund category continues to evolve, there are several instances of new products that are no longer pure target-date strategies in the sense of a strictly age-based asset allocation solution, but to refer to them as managed accounts would be overstating their ability to customize for the end-investor.

To create some structure around this hybrid target-date/managed account emerging category, Cerulli references two sub-categories: dynamic qualified default investment alternative (QDIA) and personal target-date fund.

Alight and Advizr in financial wellness partnership

Alight Solutions, a provider of “technology-enabled health, wealth and human capital management solutions,” has added Advizr WorkPlace, a set of financial management and planning tools, as an option among Alight’s suite of financial well-being solutions for the employees of its benefits administration clients.

Three Alight clients, representing over 500,000 employees, have implemented Advizr Workplace, according to a news release. Advizr Inc. is a financial wellness technology company based in New York, NY. Its software supports 401(k) plan participants. It also produces Advizr Core, which advisors can use to help grow their practices.

Advizr is designed to help employees with debt management, budgeting, protection, college savings, and retirement planning. Help from an Alight investment advisor representative is also available, with some restrictions. Advizr Workplace is available as a stand-alone solution to Alight’s benefits administration clients.

According to the release, Advizr allows users to “assess spending, manage debt, evaluate life insurance coverage needs, prioritize and track goals and build a plan for their unique financial objectives and to evaluate ‘what if’ scenarios.

“Research continues to prove that reducing financial insecurity leads to improved employee productivity, morale and retention, while lowering rates of absenteeism and healthcare expenditures,” the release said.

AIG buys Ellipse, a UK group life insurer

American International Group, Inc., announced that AIG Life Limited, a UK subsidiary of AIG Life & Retirement, has completed the previously agreed acquisition of Ellipse, a specialist group life, critical illness and income protection provider in the UK, from Munich Re.

“AIG believes Ellipse’s group protection expertise, alongside its technology-enabled business model, makes it a strong strategic fit with the existing AIG Life Limited operation in the UK,” according to an AIG release.

AIG Life will now distribute both group and individual protection insurance products to UK consumers through financial intermediaries, employee benefits consultants and partnerships.

© 2019 RIJ Publishing LLC. All rights reserved.

Money Myths, Legal Realities

Posted on January 3, 2019 by -

Aside from knowing that money doesn’t grow on trees, do we really understand where it comes from? Banks supposedly create money out of thin air just by lending. The Federal Reserve magically found trillions of dollars to resolve the financial crisis. But how? And for whose benefit?

That second question—for whose benefit do the banks and the Fed create money—was front and center at the Harvard Law School a few weeks ago. During a two-day conference called, “Money as a Democratic Medium,” a parade of academics presented the case that money over recent decades has been co-opted, even hijacked.

“We’ve allowed money creation to be privatized,” said Morgan Ricks, a professor at Vanderbilt School of Law, who spoke at the conference.

If you’re of a libertarian, gold-loving, neoliberal bent, you’d probably say that industrious people create money and politicians confiscate it through taxation. If so, you’d have been lonely at this conference. Many of the historians and economists there believed that bankers, abetted by lawyers, have stolen the public’s purse.

Law, in fact, is essential to the story. One law professor showed that US law has been explicitly written to prevent blacks from accumulating wealth. A Columbia law professor explained how lawyers invent new kinds of collateral and play regulatory arbitrage. A Connecticut banker described his ongoing legal battle to deposit client money in an interest-bearing account at the Fed.

An all-but-invisible presence at the conference was Modern Monetary Theory, or MMT. MMT is a type of chartalism, a branch of macroeconomics that describes today’s money as circulating government debt, given legitimacy by a government, and financed by taxes. Christine Desan, Ph.D., who organized “Money as a Democratic Medium,” spoke at an MMT conference in late September. The mere fact that Harvard hosted this conference may signal a breakthrough in recognition for MMT, which most mainstream economists consider fringy.

Money and the law: Inseparable

Held in Wasserstein Hall on the law school campus, the free conference featured more than 50 presenters and was attended by hundreds of academics and Harvard students. Several of the presenters offered evidence that, historically and up to the present day, US banks and courts have created byzantine rules that privilege certain parties—often the ones who write the rules—and disadvantage others.

One of the first speakers was Katharina Pistor, a professor at Columbia Law School and the author of the forthcoming The Code of Capital (Princeton, 2019). If you like the current banking system, Pistor had good news: The status quo is protected by a deep moat of securities laws, bankruptcy laws, and contract laws. Globalization makes it harder than ever for national governments to stop securities lawyers from creating exotic new negotiable assets, like a CDO-squared.

“In times of globalization the idea that we could control money top down is problematic,” said Pistor, who seemed appalled by the situation. “Lawyers have pushed the limits on creating new types of assets. It’s hard to regain control over these processes. It’s hard to dislodge control at the national or even the global level. Only the US and the UK acting together could roll back some of the excesses.”

Mehrsa Baradaran

In a presentation that drew a standing ovation, Mehrsa Baradaran, a banking law specialist at the University of Georgia and author of The Color of Money: Black Banks and the Racial Wealth Gap (Belknap, 2017), made a richly-documented case for the idea that African-Americans have been systematically marginalized from the larger economy, with restricted access to banks, credit and homeownership, a traditional path toward capital accumulation.

After the Civil War, the government created the Freedman’s Bank. But the bank failed in the Panic of 1873, taking with it $75 million in savings from 80,000 depositors and leaving many American blacks with an ingrained mistrust of financial institutions, Baradaran said. Injustices continued into the modern era. In its early versions, Social Security didn’t cover domestic workers, many of whom were black women. After World War II, blacks were barred from buying homes in Levittown, the archetypical suburbia that was financed with federally insured loans.

Another speaker was James McAndrews, a former Federal Reserve researcher and a faculty member at University of Chicago’s Booth School of Business. McAndrews is also CEO of The Narrow Bank, or TNB USA, which was founded in Connecticut in 2016 to perform one function. TNB would accept large deposits from institutions and transfer the money to an account at the Fed.

McAndrews wanted to cash in on the Fed’s policy, introduced after the 2008 crisis, of paying member banks 1.95% on their excess reserves. Those banks are not passing those earnings through to depositors, however. McAndrews saw an opportunity to get an account for TNB at the Fed, and pass through 1.90% of that 1.95% to his depositors, taking a five basis-point service fee ($500 per $1 million).

But the Federal Reserve Bank of New York denied TNB USA a Master Account. So last September, McAndrews sued the Fed. The Fed won’t say why it won’t give TNB an account. But, as TNB says in its lawsuit, “If successful, TNB would place competitive pressure—primarily on large banks—to raise depository interest rates for all depositors.”

What about wampum?

Desan, the organizer of the conference, is a law professor who, after setting out to write a legal history, ended up writing a history of English money because, as she told an audience in New York in late September, the English legal system and English money grew up together. A nation’s money, she found, is a legal construct—a creature of the law, a contract.

But what about wampum, cowry shell money and especially gold, which many consider the only true money? Didn’t primitive people create so-called “commodity money” to ease the frictions of barter? Didn’t “goldsmith bankers” invent paper money by circulating gold receipts? Isn’t money a private matter?

Those are well-preserved fictions, Desan explains in Making Money: Coin, Currency and the Coming of Capitalism (Oxford, 2014). The immense abstract quantities of national currencies that now exist did not evolve from the exchange of gold coins between private traders, she says. According to her book (and a growing shelf of financial histories with a similar theme), money in the modern sense appeared when kings and parliaments, to mobilize unprecedented sums for war or infrastructure, began spending IOUs whose value depended on the future redemption of those same IOUs as taxes.

“Making money, a phenomenon almost impossible to explain if we limit our field of vision to individuated exchange, becomes easily comprehensible once we enlarge that lens to include the collective activity that links individuals and communities,” Desan writes. “Money is a way to mark and mobilize material value that can start at the center, work selectively and with limited information, and yet enlist the contributions of a broad group.” If you read this book, you’re bound to look at money in an entirely new way.

© 2019 RIJ Publishing LLC. All rights reserved.